Episode Details

I wanted to consider the Great (irony klaxon) British pound today, and indeed currencies more generally.

So many people — too many people — are forecasting some kind of UK debt crisis, which would almost certainly take down sterling. Yet, some weakness in the last week or two aside, sterling has actually had a pretty good year — by FX standards, that is. Of course, it’s been crap against gold and bitcoin. Proper money.

A word of warning: while my macro calls are generally pretty good, on sterling they’ve been consistently terrible. Doesn’t mean I won’t eventually get one right. Maybe today’s the day.

I’m trying to go into this article with no preconceptions. I haven’t yet decided which way I think sterling’s going. I’m ambivalent. I’m going to make my conclusions based on price action, which I’ll study as I write.

Were I to base my call on the current fundamentals of the UK economy — high taxes about to get higher, more regulations, more government spending, uncontrollable deficits, and an unpopular, incompetent government with little in the way of coherent vision or first principles, but likely here to stay for the next four years — I’d be more bearish than Winnie the Pooh.

But FX is a funny old game, as low-IQ football pundits from the 1980s were prone to say. On the other side of every currency pair is another nation with its own, sometimes bigger problems.

The direction of cable — GBPUSD — for example, tends to be determined byUS dollar strength or weakness, rather than the pound, because the US has the weightier economy. The pound could be woefully managed (it is), but if the US powers-that-be want the dollar lower, that urge will be more significant.The same goes for the yen or the euro.

Interest rates are a huge factor too and, here in the UK, despite word that the Bank of England was going to take them down a notch or two, yesterday’s news that UK inflation ‘unexpectedly’ hit its highest level since January 2024 means it’s now going to struggle to do that. Inflation is supposed to be below 3% — it’s currently 3.6%, the highest of the G7 nations.

Look at this headline from the Guardian if you want to see how mainstream thinking gets cause and effect completely backwards.

Since when do food and fuel prices drive inflation? It’s the other way round. They’re the consequences of inflation.

Meanwhile, Bank of England Governor Andrew Bailey said only two days ago in the Times: “I really do believe the path is downward” for interest rates. (They currently stand at 4.25%, with the next MPC meeting on August 7th). So yesterday’s numbers leave him with even more egg on what is already an eggy face.

It’s hard to justify lower rates when we have the highest inflation in the G7. The market, meanwhile, seems to think we won’t get lower rates, because the pound actually steadied on yesterday’s surprise inflation numbers.

But if the Bank wants lower rates, I’m sure they’ll employ some wonk-speak sophistry to justify it.

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Taking the big picture